Sign in with your social account?

News

The State Pension Model Isn’t Working

Last September, I issued a rather dire Pension Storm Warning. I said that I expect more cities to go bankrupt, as Detroit did.

Not because they want to, but because they have no choice. You can’t get blood from a rock, which is what will be left after the top taxpayers move away and those who stay vote to not raise taxes.

The citizens that vote not to pay the committed debt will be fed up with paying more taxes because they will be at the end of their tax rope. I am not arguing that is fair, but it is already happening and will happen more.

States Are a Different and Larger Problem

Under our federal system, states can’t go bankrupt. Lenders perversely see this as positive because it removes one potential default avenue. They forget that a state’s credit is only as good as its tax base, and the tax base is mobile.

States don’t have those two advantages. They have tighter credit limits and their taxpayers can freely move to other states.

Many elected officials and civil servants seem not to grasp those differences. They want something that can’t be done, except in Washington, DC. I think this has probably meant slower response by those who might be able to help. No one wants to admit they screwed up.

In theory, state pensions are stand-alone entities that collect contributions, invest them for growth, and then disburse benefits. Very simple. But in many places, all three of those components aren’t working.

Employers (governments) and/or workers haven’t contributed enough.

Investment returns have badly lagged the assumed levels.

Expenses are more than expected because they were often set too high in the first place, and workers lived longer.

The Next Recession Will Aggravate this Problem

Any real solution will have to solve all three challenges—difficult even if the political will exists. A few states are making tough choices, but most are not. This is not going to end well for taxpayers or retirees in those places.

Almost everyone involved is in deep denial about this. They think a miracle will save them, apparently. I don’t rule out anything, but I think bankruptcy and/or default is the more likely outcome in many cases.

Join hundreds of thousands of other readers of Thoughts from the Frontline

DISCLOSURE:
The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

GTX Corp, along with its subsidiaries, is engaged in design, development, manufacturing, distribution and sales of products and services in the GPS and BLE wearable technology personal location and wandering…